Cryptocurrency: A brave new world

Cryptocurrency: A brave new world

The latest development in cryptocurrency, Gitcoin, launched yesterday. It aims to provide a smart market for developers and programmers to exchange ideas and develop technology projects, and receive payment in virtual currency Ethereum.

Developers will publicly advertise work on the platform, which connects coders to suitable projects, eliminating the need for a third party. The programmer is paid in ‘Ether’ upon completion of the work through an enforceable smart contract, which limits the risk to both parties to the transaction.

This new creative exchange indicates the enormous potential scope of blockchain technology, which to a large extent remains untapped. Recent analysis by the consultancy Accenture, working jointly with benchmarking firm McLagan, suggests that a widespread adoption of the technology could save banks up to $12 billion each year in infrastructure costs by 2025.

An international view

A deputy director of the Central Bank of Nigeria recently described cryptocurrency as a wave that cannot be stopped by the central bank, and announced that the bank are preparing a white paper on the subject. This comes as the Chinese government has taken steps to shut down several cryptocurrency exchanges out of fear of the social change they encourage. These wildly contrasting attitudes indicate how little understood cryptocurrencies are around the world and how the technology is being treated differently based on domestic socio-political factors.

Volatility in the market

On 25 June 2017, a message appeared on the online forum 4chan indicating that the founder of the cryptocurrency Ethereum, Vitalik Buterin, had died. This fake news spread quickly, and within a day the total value of Ethereum in circulation had dropped by 20%, or $4 billion. This enormous volatility has both attracted and dissuaded investors from this alien newcomer on the global financial stage.

Speaking at a recent conference in New York, the JP Morgan boss, Jamie Dimon, branded virtual currencies a fraud that will “blow up”. In a recent statement he suggested that virtual currency could not work and was only of use to people living in “Venezuela or Ecuador or North Korea [or] if you were a drug dealer, a murderer”. Dimon’s comments reflect a prevailing sentiment amongst the financial establishment and led to a 6% fall in Bitcoin’s value, a further reminder of the sensitivity surrounding the use of virtual currency.

However, the prospect of quick and easy money has attracted a diverse range of investors. The primary cryptocurrency, Bitcoin, has quintupled in value this year alone, rising from around $950 to over $4880 per Bitcoin at its highest. It has also seen the highest growth of any currency, traditional or virtual, in five of the last six years. At the time of writing, Bitcoin was trading at $3946.45.

Clear potential for almost limitless growth

The clear commercial potential of such consistent growth has led to market-leader IBM striking a deal with the Digital Trade Chain Consortium, a group of seven major European banks, to design a cryptocurrency exchange to run on IBM’s own cloud network.

Widespread interest has helped cryptocurrency to shed some of its reputation as a money-laundering and anonymous payment facility for criminals. However, the recent jailing of Ross Brennan in September 2017 for over 13 years for running an online drugs operation that used Bitcoin, is a reminder of how prevalent the illegal use of cryptocurrencies still is today.

The controllers and founders of these online currencies face the challenge of building up a legitimate commercial reputation, which will in turn attract serious mainstream investment. As Peter Denious, Head of Global Venture Capital at Aberdeen Asset Management, told Bloomberg News in June, “A lot of lessons will be learned and a lot of money will be lost, before a lot of money can be made”.

While the financial elite largely watch with interest from the side lines, new records continue to be broken – a recently launched currency, EOS, raised a record $100 million in 3 days. From almost nowhere, cryptocurrency now accounts for an estimated 2% of the worldwide financial exchange, a development that few in the financial elite would ever have predicted less than 3 years ago.

Look out for our guide to Cryptocurrency

We will shortly be publishing a new guide to the legal and commercial issues surrounding cryptocurrency through our BM Insight legal resources section. This guide is designed to decipher the potential relevance of this exciting new development to our business clients. If you would like to receive a free copy of this guide then register your interest by emailing us on insight@blasermills.co.uk